Solutions manual for advanced accounting 10th edition fischer cheng taylor1

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CHAPTER 1

UNDERSTANDING THE ISSUES

1 (a) Horizontal combination—both are

ma-rine engine manufacturers

(b) Vertical combination—manufacturer

buys distribution outlets

(c) Conglomerate—unrelated businesses

2 By accepting cash in exchange for the net

assets of the company, the seller would

have to recognize an immediate taxable

gain However, if the seller were to accept

common stock of another corporation

in-stead, the seller could construct the

trans-action as a tax-free reorganization The

sel-ler could then account for the transaction

as a tax-free exchange The seller would

not pay taxes until the shares received

were sold

3 Identifiable assets (fair value) $600,000

Deferred tax liability

4 (a) The net assets and goodwill will be

recorded at their full fair value on the

books of the parent on the date of

ac-quisition

(b) The net assets will be “marked up” to

fair value, and goodwill will be recorded

at the end of the fiscal year when the

consolidated financial statements are

prepared through the use of a

consoli-dated worksheet

5 Puncho will record the net assets at their

fair value of $800,000 on its books Also,

Puncho will record goodwill of $100,000

($900,000 – $800,000) resulting from the

excess of the price paid over the fair value

Semos will record the removal of its net

as-sets at their book values Semos will record

a gain on the sale of business of $500,000

($900,000 – $400,000)

6 (a) Value Analysis:

Price paid $ 800,000 Fair value of net assets 520,000 Goodwill $ 280,000 Current assets (fair value) $ 120,000 Land (fair value) 80,000 Building & equipment

(fair value) 400,000 Customer list (fair value) 20,000 Liabilities (fair value) (100,000) Goodwill 280,000 Total $ 800,000 (b) Value Analysis:

Price paid $ 450,000 Fair value of net assets 520,000 Gain $ (70,000) Current assets (fair value) $ 120,000 Land (fair value) 80,000 Building & equipment

(fair value) 400,000 Customer list (fair value) 20,000 Liabilities (fair value) (100,000) Gain (70,000) Total $ 450,000

7 The 20X1 financial statements would be

revised as they are included in the 20X2 – 20X1 comparative statements The 20X2 statements would be based on the new values The adjustments would be:

(a) The equipment and building will be tated at $180,000 and $550,000 on the comparative 20X1 and 20X2 balance sheets

(b) Originally, depreciation on the

equip-ment was $40,000 ($200,000/5) per year It will be recalculated as $36,000 ($180,000/5) per year The adjustment for 20X1 is for a half year 20X1 depre-ciation expense and accumulated de-preciation will be restated at $18,000 instead of $20,000 for the half year

Depreciation expense for 20X2 will be

$36,000

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(c) Originally, depreciation on the building

was $25,000 ($500,000/20) per year

It will be recalculated as $27,500

($550,000/20) per year The

adjust-ment for 20X1 is for a half year 20X1

depreciation expense and accumulated

depreciation will be restated at $13,750

instead of $12,500 for the half year

Depreciation expense for 20X2 will be

$27,500

(d) Goodwill is reduced $30,000 on the

comparative 20X1 and 20X2 balance

sheets

8 Fair value of operating unit $1,200,000

Book value including goodwill 1,250,000

Goodwill is impaired

Fair value of operating unit $1,200,000

Fair value of net identifiable

assets 1,120,000

Recalculated goodwill 80,000

Existing goodwill 200,000

Goodwill impairment loss $ 120,000

9 (a) An estimated liability should have been

recorded on the purchase date Any

dif-ference between that estimate and the

$100,000 paid would be recorded as a

gain or loss on the liability already

rec-orded

(b) Even though the issuance is based on performance and suggests additional goodwill, no adjustment is made if addi-tional stock is issued In this case, the paid-in capital in excess of par account

is reduced for the par value of the tional shares to be issued The fair val-

addi-ue of the stock originally issaddi-ued is ing devalued

The entry would take the following

form:

Paid-In Capital in Excess of Par 10,000 Common Stock

($1 par) 10,000 (c) This agreement is also settled by is-

suing shares The price is not changed

The paid-in capital in excess of par count is reduced for the par value of the additional shares to be issued The fair value of the stock originally issued

ac-is being devalued

The entry would take the following

form:

Paid-In Capital in Excess of Par 5,000 Common Stock

($1 par) 5,000

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Cash 15,000 (2) Cash 800,000

Liabilities 100,000

Accumulated Depreciation—Building 200,000

Accumulated Depreciation—Equipment 100,000

Current Assets 80,000 Land 50,000 Building 450,000 Equipment 300,000

Gain on Sale of Business 320,000

Note: Seller does not receive the acquisition costs

(3) Investment in Crow Company 800,000

Cash 800,000 Expenses (acquisition costs) 15,000

Cash 15,000

Note: At year-end, Crow would be consolidated with Bart, as explained in Chapter 2

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Paid-In Capital in Excess of Par 10,000

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Customer list ($100,000 payment discounted 3 years at 20%) 210,650

Estimated liability under warranty (30,000)

Value of net identifiable assets acquired 1,022,650 Excess of total cost over fair value of net assets (goodwill) $ 477,350

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Cash 25,000

*Total consideration:

Cash $160,000 Less fair value of net assets acquired:

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Ch 1–Exercises

EXERCISE 1-5

(1) Adjustments:

Final value of manufacturing plant $700,000

Provisional value of manufacturing plant 600,000

Total increase $100,000

Depreciation adjustment:

Depreciation on final cost ($700,000/10 years) $70,000

Depreciation based on provisional cost ($600,000/10 years) 60,000

Annual increase in depreciation $10,000

Adjustment for half year $5,000

Journal Entries:

Plant Assets 100,000

Goodwill 100,000

Retained Earnings (increase depreciation for half year) 5,000

Plant Assets (because they are shown net

of depreciation) 5,000

December 31, 20X1 (revised) Current assets $ 300,000 Current liabilities $ 300,000

Equipment (net) 600,000 Bonds payable 500,000

Plant assets (net) 1,695,000 Common stock ($1 par) 50,000 Goodwill 200,000 Paid-in capital in excess of par 1,300,000

Retained earnings 645,000 Total assets $2,795,000 Total liabilities and equity $2,795,

Summary Income Statement For Year Ended December 31, 20X1 (revised) Sales revenue $800,000 Cost of goods sold 520,000

Gross profit $280,000 Operating expenses $150,000

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Ch 1–Exercises

EXERCISE 1-6

Machine = $200,000

Deferred tax liability = $16,800

In this tax-free exchange, depreciation on $56,000 [($200,000 appraised value) – ($144,000*

net book value)] of the machine’s value is not deductible on future tax returns The additional tax

to be paid as a result of Lewison’s inability to deduct the excess value assigned to the machine

is $16,800 ($56,000 × 30%)

Goodwill = $800,000 – ($700,000 – $16,800)

= $116,800

*$180,000/10 yrs × 2 prior years = $36,000 accumulated depreciation

$180,000 – $36,000 = $144,000 net book value

*Tax loss carryforward consideration:

Deferred tax asset ($400,000 × 30%) = the value of the

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(2) Shares issued = $60,000/$5 per share = 12,000 shares

Since the contingency is settled in shares, goodwill is not increased and cash is not

changed The entry to record the 12,000 additional shares issued is as follows:

Common Stock ($1 par) 12,000 (3) Paid-In Capital in Excess of Par 50,000

Common Stock ($1 par) 50,000 Deficiency [($6 – $4) × 100,000 shares] $200,000

Divide by fair value ÷ $4

Added number of shares 50,000

EXERCISE 1-9

(1) Purchase price $600,000 Fair value of net assets other than goodwill 400,000 Goodwill $200,000 The estimated value of the unit exceeds $600,000, confirming goodwill

(2) (a) Estimated fair value of business unit $520,000

Book value of Anton net assets, including goodwill $500,000

No impairment exists

(b) Estimated fair value of business unit $400,000 Book value of Anton net assets, including goodwill $450,000 Goodwill is impaired

Estimated fair value of business units $400,000 Fair value of net assets, excluding goodwill 340,000 Remeasured amount of goodwill $ 60,000 Existing goodwill 200,000 Impairment loss $140,000

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Ch 1–Exercises

APPENDIX EXERCISE

EXERCISE 1A-1

(1) Calculation of Earnings in Excess of Normal:

Average operating income:

Fair value of total assets $875,000

Industry normal rate of return × 12%

Normal return on assets 105,000 Expected annual earnings in excess of normal $ 5,000 (a) 5 × $5,000 = $25,000 Goodwill

(b) Capitalize the perpetual yearly earnings at 12%:

Goodwill =

RatetionCapitaliza

EarningsExcess

(c) Present value of a $5,000 annuity capitalized at 16% The correct present value factor

is found in the “present value of an annuity of $1” table, at 16% for 5 periods This factor

multiplied by the $5,000 yearly excess earnings will result in the present value:

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Value of net identifiable assets acquired 357,000

Excess of total cost over fair value of net assets (goodwill) $143,000

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Ch 1–Problems

Problem 1-1, Concluded (2) Acquisition price $300,000

Excess of fair value of net assets over cost (gain) $ (57,000) Journal Entry:

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Ch 1–Problems

PROBLEM 1-2

Total consideration for Vicker:

Common stock (30,000 shares × $40) $1,200,000 Less fair value of net assets acquired:

Excess of total cost over fair value of net assets (goodwill) $ 310,000

Bar entry to record the purchase of Vicker:

Common Stock (30,000 shares × $10 par) 300,000

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Ch 1–Problems

Problem 1-2, Concluded Total consideration for Kendal:

Common stock (15,000 shares × $40) $600,000

Less fair value of net assets acquired:

Bar entry to record the purchase of Kendal:

Acquisition Expense 4,000

Cash 4,000 Paid-In Capital in Excess of Par 15,000

Cash 15,000

To record issue and acquisition costs

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Excess of total cost over fair value of net assets (goodwill) $235,000

Cash 20,000 (2) Pro Forma Income:

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Ch 1–Problems

PROBLEM 1-4

(1) $500,000 consideration

Total consideration for Williams:

Kiln Corporation journal entries:

Excess of fair value of net assets over cost (gain) $ (35,000) Kiln Corporation journal entries:

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Ch 1–Problems

PROBLEM 1-5

Total consideration for Jake:

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Ch 1–Problems

PROBLEM 1-6

Total consideration for Sylvester:

Payroll and Benefit-Related Liabilities (12,500)

Debt Maturing in One Year (10,000)

Long-Term Debt (248,000)

Payroll and Benefit-Related Liabilities (156,000)

Payroll and Benefit-Related Liabilities—Current 12,500

Debt Maturing in One Year 10,000

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Common Stock (15,000 shares × $2) 30,000

Estimated Contingent Liability 37,500

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Ch 1–Problems

Problem 1-7, Concluded (2) Revised estimate of contingent payment ($50,000 × 90%) $45,000

Original estimate ($50,000 × 75%) 37,500

Net increase $ 7,500

Journal Entry:

Loss on Estimated Contingent Liability 7,500

Estimated Contingent Liability 7,500

PROBLEM 1-8

Total consideration for Jones:

Gain on Acquisition of Business 26,000 Cash 150,000

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Ch 1–Problems

PROBLEM 1-9

Combined Income Statement For the Period Ending December 31, 20X1 Sales revenue $620,000 Cost of goods sold 223,000 Gross profit $397,000 Selling expense $140,000

Administrative expenses 172,500

Depreciation expense 20,550

Amortization expense 10,600 343,650 Income from operations $ 53,350 Other income and expenses 7,000 Income before taxes $ 60,350 Provision for income taxes 18,105 Net income $ 42,245

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Ch 1–Problems

Problem 1-9, Continued Name of Acquiring Company: Faber Enterprises Name of Acquired Company: Ann’s Tool Company

Income Statement For the Year Ending December 31, 20X1

(Tax rate expressed as 0.3 for 30%)

Income Statement Accounts Enterprises Tool Co Debit Credit Income Statement

Amortization Expense—Ann’s Tool 1,000 (3) 4,000 5,000

Total Operating Expenses 294,400 42,250 343,650 Operating Income (55,600) (2,750) (53,350Nonoperating Revenues and Expenses:

Buildings 2,500 Patent 1,500

Equipment 3,500 Computer software 2,500

Trucks 750 Copyright 1,000

Total new depreciation 6,750 Total new amortization 5,000

Recorded depreciation 3,750 Recorded amortization 1,000

Adjustment 3,000 Adjustment 4,000

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Ch 1–Problems

Problem 1-9, Concluded (2) Pro forma disclosure for 20X1 as if acquisition occurred at the start of the year:

Sales revenue ($550,000 + $140,000) $690,000

Net income $39,270

Calculation of net income:

Reported net incomes before tax ($66,600 + $1,500) $ 68,100

Total consideration for Iris:

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Ch 1–Problems

Problem 1-10, Continued Journal Entry:

Paid-In Capital in Excess of Par ($270,000 – $50,000) 220,000

Cash 10,000 Part B

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Ch 1–Problems

Problem 1-10, Concluded Worksheet for Pro Forma Income Statement For the Year Ending December 31, 20X2

(Tax rate expressed as 0.4 for 40%:)

Building $4,000 Patent $1,200

Equipment 5,000 Copyright 2,600 (4) Expense acquisition costs

Total new $9,000 Total new $3,800

Recorded 8,600 Recorded 3,900

Adjustment $ 400 Adjustment $ (100)

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Ch 1–Problems

PROBLEM 1-11

Current Assets 100,000

Assets Under Operating Leases (fair) 580,000

Net Investment in Direct Financing Leases* 710,605

Leased Equipment Under Capital Lease (fair) 60,000

Estimated Liabilities Under Lawsuit (estimate) 50,000

Cash 2,300,000

*Recorded net investment in direct financing leases $730,000

Less adjustment for $50,000 per year lease:

Present value of payments of $50,000 per year for

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Ch 1–Problems

PROBLEM 1-12

Current Assets 150,000

Equipment ($100,000 increase) 300,000

Land and Buildings 250,000

Deferred Tax Asset 36,000

Goodwill* 94,000

Bonds Payable 200,000 Deferred Tax Liability 30,000 Common Stock ($10 par) 100,000 Paid-In Capital in Excess of Par 500,000

Deferred tax liability [30% × ($300,000 – $200,000)]

from deferred increase in equipment value (30,000)

Land and buildings 250,000

Bonds payable (200,000)

Deferred tax asset (30% × $120,000) from carryover losses 36,000 506,000 Excess attributable to goodwill (net of deferred tax liability) $ 94,000 Acquisition Expense 10,000

Cash 10,000 Paid-In Capital in Excess of Par 3,000

Cash 3,000

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Ch 1–Problems

PROBLEM 1-13

(1) Total consideration for Walsh:

Income tax payable (190,000)

Value of net identifiable assets acquired 1,430,000 Excess of fair value of net assets over cost (gain) $ (230,000)

Common Stock ($2 × 20,000 shares) 40,000

Paid-In Capital in Excess of Par ($1,200,000 – $40,000) 1,160,000

(2) A footnote disclosure of the contingent liability of Door Corporation must be made on the

December 31, 20X1, financial statements, even though the fair value of the stock is

current-ly greater than the value on the date of issue

(3) Entry to record contingent consideration:

Common Stock (870 shares × $2) 1,740

Amount of consideration = deficiency in price × shares:

$2.50 × 20,000 shares = $50,000

Number of new shares needed:

shareper

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($150,000 + $200,000 + $100,000 + $600,000) × 10% 105,000

Profit in excess of normal return $ 45,000

Present value of excess of normal return for 5 years at 16%,

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Payment $50,000

n 5 Rate 0.07 Present value $205,010

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Ch 1–Cases

Case 1-1, Continued Part B

(1) Discounted cash flows:

Total paid price for net assets 1,300,000

Excess of fair value $ 106,855

(3) Entry to record acquisition:

Dr = Cr Check Totals 1,625,010 1,625,010

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Ch 1–Cases

Case 1-1, Concluded Part C

Impairment test:

Implied fair value of Frontier $1,200,000

Book value, including goodwill 1,300,000

Book value exceeds implied fair value; goodwill is impaired

Impairment adjustment:

Implied fair value of Frontier $1,200,000

Fair value of net identifiable assets (without goodwill) 1,020,000

Implied remaining goodwill $ 180,000

Adjustments to Pixar income Book Fair Increase Life Adjustment

Buildings and equipment

Based on this information, EPS would be diluted by the acquisition

The 2005 pro forma numbers may benefit from improved operating performance by the

com-bined firm and the one-time gain on the contract termination

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CHAPTER 2

UNDERSTANDING THE ISSUES

1 (a) Johnson has a passive level of

owner-ship and in future periods will record

dividend income of only 10% of

Bick-ler’s declared dividends Johnson will

also have to adjust the investment to

market value at the end of each period

(b) Johnson has an influential level of

ownership and in future periods will

record investment income of 30% of

Bickler’s net income Any dividends

de-clared by Bickler will reduce the

in-vestment account, but will not affect the

investment income amount

(c) Johnson has a controlling level of

own-ership and in future periods will add

100% of Bickler’s net income to its own

net income Bickler’s nominal account

balances will be added to Johnson’s

nominal accounts Any dividends

de-clared by Bickler will not affect

John-son’s income

(d) Johnson has a controlling level of ership and in future periods will add 100% of Bickler’s net income to its own net income All (100%) of Bickler’s no-minal account balances will be added

own-to Johnson’s nominal account ances This will result in consolidated net income, followed by a distribution to the noncontrolling interest equal to 20%

bal-of Bickler’s income Any dividends clared by Bickler will not affect John-son’s income

2 The elimination process serves to make the

consolidated financial statements appear

as though the parent had purchased the net assets of the subsidiary The invest-ment account and the subsidiary equity ac-counts are eliminated and replaced by the subsidiary’s net assets

Value Analysis Schedule Fair Value (100%) (0%)

Company fair value $900,000 $900,000 N/A

Fair value of net assets excluding goodwill 600,000 600,000

Goodwill $300,000 $300,000

Net Assets—marked up $200,000 ($600,000 fair value – $400,000 book value)

Goodwill—$300,000 ($900,000 – $600,000)

Company fair value $900,000 $720,000 $180,000

Fair value of net assets excluding goodwill 600,000 480,000 120,000

Goodwill $300,000 $240,000 $ 60,000

Net Assets—marked up $200,000 ($600,000 fair value – $400,000 book value)

Goodwill—$300,000 ($900,000 – $600,000)

The NCI would be valued at $180,000 (20% of the implied company value) to allow the full

rec-ognition of fair values

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4 (a) Company Parent NCI

Company fair value $1,000,000 $1,000,000 N/A

Goodwill $ 150,000 $ 150,000

The determination and distribution of excess schedule would make the following adjustments:

$1,000,000 price – $350,000 net book value = $650,000 excess to be allocated as follows:

Current assets $ 50,000

Fixed assets 450,000

Goodwill 150,000

Company fair value $ 500,000 $ 500,000 N/A

Gain on acquisition $ (350,000) $ (350,000)

$500,000 price – $350,000 net book value = $150,000 excess to be allocated as follows:

Gain on acquisition (350,000)

Company fair value $1,000,000*$800,000 $200,000

Goodwill $ 150,000 $120,000 $ 30,000

*$800,000/80% = $1,000,000

$800,000 parent’s price – (80% × $350,000 net book value) = $520,000

NCI adjustment, $200,000 – (20% × $350,000 net book value) = 130,000

Total adjustment to be allocated = $650,000 as follows:

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(b) Company Parent NCI

Company fair value $770,000** $600,000 $170,000*

Gain on acquisition $ (80,000) $ (80,000) N/A

*Cannot be less than the NCI share of the fair value of net assets excluding goodwill

**$600,000 parent price + $170,000 minimum allowable for NCI = $770,000

$600,000 parent’s price – (80% × $350,000 book value) = $320,000

NCI adjustment, $170,000 – (20% × $350,000 net book value) = 100,000

Total adjustment to be allocated = $420,000 as follows:

Gain on acquisition (80,000)

Company fair value $1,000,000*$800,000 $200,000

Goodwill $ 200,000 $120,000 $ 80,000

*$800,000/80% = $1,000,000

The NCI will be valued at $200,000, which is 20% of the implied company value The NCI

ac-count will be displayed on the consolidated balance sheet as a subdivision of equity It is shown

as a total, not broken down into par, paid-in capital in excess of par, and retained earnings

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Ch 2—Exercises

EXERCISES

EXERCISE 2-1

Solara Corporation Pro Forma Income Statement Ownership Levels

Sales $640,000 $640,000 $1,010,000 Cost of goods sold 300,000 300,000 530,000

Gross profit $340,000 $340,000 $ 480,000 Selling and administrative expenses 120,000 120,000 195,000

Operating income $220,000 $220,000 $ 285,000 Dividend income (10% × $15,000 dividends) 1,500

Investment income (20% × $65,000 reported

Fair value of net assets excluding goodwill

*Cash may be shown as a net credit of $510,000

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Liabilities and Stockholders’ Equity Liabilities:

Current liabilities $220,000

Bonds payable 350,000 $ 570,000 Stockholders’ equity:

Common stock ($100 par) $200,000

Retained earnings 280,000 480,000

Total liabilities and stockholders’ equity $1,050,000

2 (a) Investment in Plastic 530,000

Cash 530,000 (b) Investment in Plastic appears as a long-term investment on Glass’s unconsolidated

balance sheet

(c) The balance sheet would be identical to that which resulted from the asset acquisition

of part (1)

EXERCISE 2-3

Company fair value To be determined N/A

Fair value of net assets excluding goodwill $560,000* $560,000

Goodwill

Gain on acquisition

*$370,000 net asset book value + $40,000 inventory increase + $50,000 land increase +

$100,000 building increase = $560,000 fair value

(1) Goodwill will be recorded if the price is above $560,000

(2) A gain will be recorded if the price is below $560,000

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Fair value of net assets excluding goodwill 850,000* 850,000

Goodwill $100,000 $100,000

*$700,000 net book value + $50,000 inventory increase + $100,000 depreciable fixed

assets increase = $850,000 fair value

Determination and Distribution of Excess Schedule

Fair value of subsidiary $950,000 $950,000 N/A

Less book value of interest acquired:

Common stock, ($10 par) $300,000

Paid-in capital in excess of par 380,000

$200,000 book value) $ 50,000 debit D1

Depreciable fixed assets

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Ch 2—Exercises

Exercise 2-4 Concluded (3) Elimination entries:

Common Stock ($10 par)—Pail 300,000

Paid-In Capital in Excess of Par—Pail 380,000

Company fair value $ 700,000 $ 700,000 N/A

Goodwill

Gain on acquisition $(185,000) $(185,000)

Determination and Distribution of Excess Schedule

Price paid for investment $700,000 $700,000 N/A

Less book value of interest acquired:

Common stock ($5 par) $200,000

Paid-in capital in excess of par 300,000

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